PayPal Shares Jump on Strong Guidance. Is It Too Late to Buy the Stock?

Shares of PayPal (PYPL -5.10%) were climbing higher after the company reported strong second-quarter results and raised its full-year guidance. Even with the jump in price, the stock is still down more than 20% over the past year.

Let’s look at the payment company’s most recent results, long-term prospects, valuation, and whether or not it’s too late to buy the stock.

Strong results and increased guidance

For the second time this year, PayPal increased its full-year guidance following a strong earnings report.

For the quarter, the company saw its revenue rise 8% to $7.9 billion, while total payment volume (TPV) jumped 11% to $416.8 billion. Payment transactions rose 8% to 6.6 billion, while payment transactions per active account climbed 11% to 60.9 based on activity over the past year.

Branded checkout TPV rose 6% on a constant currency basis, while unbranded TPV jumped 19%. Venmo TPV, meanwhile, was up 8%.

Active accounts slipped 0.4% year over year to 429 million. However, active accounts rose by 1.8 million sequentially.

Transaction margin dollars, which is similar to gross profit margin, rose 8% to $3.6 billion. This is an important metric for PayPal. While over the past several years the company has continued to deliver strong revenue growth, it has generally come from lower-margin sources, which has hurt this metric. This was the company’s best transaction margin dollar growth since 2021. It also noted that its unbranded BrainTree business was contributing to transaction margin dollar growth for the first time in over two years.

Adjusted earnings per share (EPS) rose 36% to $1.19.

In the quarter, the company generated free cash flow of $1.4 billion. It ended the quarter with $18.3 billion in cash and investments and $12.2 billion in debt.

Looking ahead, the company forecast full-year adjusted EPS to grow by low- to mid-teens, which was up from a prior outlook of mid- to high-single-digit growth. It is looking for transaction margin dollars to grow by low to mid-single digits versus a previous forecast of being up slightly.

PayPal also increased its free cash flow outlook from $5 billion to $6 billion. It now expects to buy back $6 billion worth of shares, up from prior guidance of at least $5 billion in share repurchases.

For Q3, PayPal guided for mid-single-digit revenue growth and high-single-digit adjusted EPS growth.

Image source: Getty Images.

Is it time to buy the stock?

This was a very strong quarter from PayPal, demonstrating that the initiatives CEO Alex Chriss put in place are beginning to bear fruit. Transaction margin dollars have long been an issue for the company, so the strong growth in this area is very encouraging.

Importantly, PayPal looks like it is just getting started on its turnaround. Its exciting new Fastlane product, which allows customers to check out at various merchants with a single tap without having to set up an account and provide credit card information, is now set to become widely available to merchants in the U.S. in August. The solution has produced impressive results thus far for early testers and should be a strong growth driver for the company moving forward.

At the same time, PayPal stock remains very inexpensive. It trades at a forward price-to-earnings (P/E) ratio of just over 13.5 times and forward price-to-sales (P/S) ratio under 2 times based on 2025 estimates.

PYPL PE Ratio (Forward 1y) data by YCharts.

Given its valuation and the opportunities in front of the stock with Fastlane and other new artificial intelligence powered features, it’s not too late to buy the stock. In fact, it may be an even better opportunity than before its earnings report, because despite the recent gains in the stock price, the company is now clearly showing that its turnaround plan is beginning to work.

As such, investors should feel comfortable buying PayPal stock at current levels.

Geoffrey Seiler has positions in PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.